Steffy: Mergers no way to solve department store troubles

Published 6:30 am, Friday, March 4, 2005

Federated Department Stores' $10.4 billion bid for rival May Department Stores may be the last great pairing in the big-box retailing world.

Those left standing are going to find it harder than ever to stay in the game.

Nowhere, perhaps, is the silence more deafening than in Little Rock, Ark., hometown of Dillard's.

The Federated-May marriage is a double whammy for Dillard's, a heightened threat that also removed a potential suitor. It will, as Oppenheimer & Co. analyst Bernard Sosnick said in a report this week, "increase the competitive pressure on Dillard's and decrease its potential value on the auction block."

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A Dillard's spokeswoman declined to comment on the company's plans or its competitive landscape.

Dillard's is now analysts' least-favorite stock among all the companies in the Standard & Poor's 500 index, according to an analysis by Bloomberg News. Six of the 10 analysts who follow the company, including Sosnick, who cut his rating this week, now recommend selling the stock. The other four rate it a hold.

That's a big change from last year, when Dillard's shares performed better than any other department store, rising 63 percent. Much of that increase was fueled by investor speculation that larger rivals would gobble up smaller chains such as Dillard's and Saks.

And Federated, which under Chief Executive Terrry Lundgren had reversed declining sales and repaid debt, was seen as the most likely buyer.

Now, with Federated betrothed to May, Dillard's allure has waned. So far this year, its shares have fallen more than 11 percent, the worst among department store companies.

Investors were hoping that Dillard's would make an attractive takeover, if not for its retailing — it reported combined losses of $45 million during the past two fiscal quarters — then for its real estate. All that prime mall-front property, the theory went, outweighed the losses and stiff competition.

Last year's great real estate play, though, now looks like a glut. Federated will close stores, and so will Kmart when it completes its purchase of Sears. Hundreds of stores will be up for grabs. Mall anchors, in other words, are losing their weight with investors.

A changing mall

So whither Dillard's? The retailer has emerged as the biggest loser in the Federated-May deal, outgunned and outmaneuvered.

I am not, as I've said before, a fan of either the Kmart-Sears or Federated-May deals because they aren't likely to help shareholders or address the bigger concerns that all department stores are facing: declining appeal with customers.

Whether it's Sears or Kmart or Foley's or Macy's or Dillard's, most shoppers are now going to Wal-Mart and Target or specialty shops like Best Buy or Bed, Bath and Beyond.

Malls as we know them are changing. This week, the New York Times wrote about a new mall in Jacksonville, Fla., that has only one department store: Dillard's. The other anchors are a sporting goods outlet, a Cheesecake Factory and a Barnes & Noble.

Together or apart, merged or unmerged, department stores' survival hinges on recapturing their allure with customers. Their sales are growing at a fraction of the rate of specialty stores.

It's a conundrum that size alone can't solve.

Dillard's, like other retailers left standing by the recent mergers, doesn't need a suitor so much as it needs a solution.

Update on credit scores

In September, I wrote about Conroe resident
Howard Bensema
, who spent a lifetime eschewing debt and was being punished with a low credit score. Bensema's auto insurer charges him a higher rate because of his lack of credit history.

Last week, Bensema went to Austin to share his story with lawmakers. While he found them receptive, they proposed creating, in essence, an average score for people like Bensema who have thin credit histories.

"I told them that this is not an appropriate approach since it would result in an even higher premium," Bensema told me in an e-mail message.

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It also misses the point. In our debt-burdened culture, people like Bensema should be rewarded, not penalized, for their prudence.

Loren Steffy is the Chronicle's business columnist. His commentary appears Sundays, Wednesdays and Fridays. Contact him at loren.steffy @chron.com.